Legislature(2003 - 2004)

03/29/2004 09:10 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HJR 26    Proposing  amendments  to the  Constitution of  the                                                                   
          State   of   Alaska   relating  to   and   limiting                                                                   
          appropriations  from  and  inflation  proofing  the                                                                   
          Alaska permanent fund  by establishing a percent of                                                                   
          market value spending limit.                                                                                          
                                                                                                                                
          HJR 26 was HEARD and HELD in Committee.                                                                               
                                                                                                                                
                                                                                                                                
HOUSE JOINT RESOLUTION NO. 26                                                                                                 
                                                                                                                                
     Proposing  amendments to the  Constitution of  the State                                                                   
     of Alaska  relating to and limiting  appropriations from                                                                   
     and  inflation proofing  the  Alaska  permanent fund  by                                                                   
     establishing a percent of market value spending limit.                                                                     
                                                                                                                                
Co-Chair Harris  MOVED to  ADOPT Amendment #3,  #23-LS1006\V,                                                                   
Cook, 3/22/04.  (Copy on File).   Co-Chair Williams OBJECTED.                                                                   
                                                                                                                                
SENATOR GENE THERRIAULT spoke  to Amendment #3.  He addressed                                                                   
concerns voiced by the public  and members of the Legislature                                                                   
regarding  possible changes  to  the Permanent  Fund and  the                                                                   
methodology used to determine  that fund.  The first issue is                                                                   
one  of  protecting   the  principal  of  the   fund.    When                                                                   
describing the  Permanent Fund, it should be  understood that                                                                   
the money  of the principal cannot  be touched no  matter how                                                                   
much  it is  needed  and the  only way  in  which that  could                                                                   
change  is through  a  vote  by the  people  of  Alaska.   He                                                                   
commented that  the thought of  moving toward a  pure Percent                                                                   
of Market Value  (POMV) methodology would lift  the bars that                                                                   
protect the principal.                                                                                                          
                                                                                                                                
Senator Therriault indicated that  Amendment #3 preserves the                                                                   
idea  of  separate   principal.    There  would   remain  the                                                                   
protected principal of the Permanent  Fund and would create a                                                                   
sub account  within the  Earnings Reserve  Account.   The two                                                                   
accounts  would  then  be managed  together  except  for  the                                                                   
allowable 5%  draw.  That amount  could only be drawn  out of                                                                   
Earnings Reserve  Account.  If  the allowed draw is  only 5%,                                                                   
there could be no access to the  entire $4.5 billion dollars.                                                                   
                                                                                                                                
Senator  Therriault  mentioned that  there  are  a number  of                                                                   
ideas floating around  about how to manage it.   The Trustees                                                                   
suggested a statutory  fund that would protect  the principal                                                                   
if the State  moved into a series  of down market years.   He                                                                   
doubted that the public would  understood how that worked and                                                                   
thought that  the idea of the  Percent of Market  Value would                                                                   
turn  out  to be  an  "easy  criticism"  for them.    Senator                                                                   
Therriault pointed  out that the public wants  to protect and                                                                   
guarantee  the dividend.   He voiced  support for making  the                                                                   
dividend multi  generational and was resistant  to a one-time                                                                   
disbursement  as proposed  by  Senator Mackie  during a  past                                                                   
legislature.                                                                                                                    
                                                                                                                                
Senator Therriault stressed that  there should be a long-term                                                                   
dividend  acknowledged  in the  Constitution.   The  language                                                                   
should  indicate  that  from  the  5% draw  and  out  of  the                                                                   
earnings reserve, the money can be used for two things:                                                                         
                                                                                                                                
   ·    Continuation of the dividend; and                                                                                       
   ·    Use of the remaining funds for public education.                                                                        
                                                                                                                                
Senator  Therriault  noted  that Co-Chair  Harris  had  added                                                                   
language to  cover the  costs of the  fund's management.   He                                                                   
thought that would  be a policy call.  If there  is access to                                                                   
use of  some of the  earnings, the public  will want  to know                                                                   
what those  earning are being  used for rather  than assuming                                                                   
purposes  of  general  government.     He  pointed  out  that                                                                   
everyone can think  of something that they "loathe  to hate".                                                                   
The constitutional mandate that  enjoys widespread support is                                                                   
public education.   That is  the recommendation set  forth by                                                                   
Amendment #3 to address what the  earnings are used for.  The                                                                   
term  "public  education"  is  broad  and  could  cover  K  -                                                                   
University, K  - 12, or K -  12 operations and capital.   The                                                                   
language  could be  left broad  and/or the  numbers could  be                                                                   
flushed out or specific to the intent.                                                                                          
                                                                                                                                
Senator  Therriault  maintained  that  the  language  of  the                                                                   
amendment  addresses   concerns  indicated  by   the  general                                                                   
publics  who  will  understand  and  appreciate  a  protected                                                                   
principal.  Currently, there is  no constitutional protection                                                                   
for the  dividend  and they want  to know  what the  earnings                                                                   
will   be   used  for.      That   creates  a   balance   for                                                                   
constitutionally  enshrining   the  dividend  and  preserving                                                                   
latitude for  future legislatures  to establish how  much can                                                                   
be steered into dividend programs.                                                                                              
                                                                                                                                
Senator Therriault summarized  that if the amendment language                                                                   
is  adopted,  it would  provide  an  indication of  what  the                                                                   
protected principal  can be and  the growth would  be limited                                                                   
to oil  rents and  royalties as they  get deposited  into the                                                                   
principal.  All  the Permanent Fund earnings  would be placed                                                                   
into  the Earnings  Reserve  Sub Account.    The only  growth                                                                   
would be  the amount deposited  into the principal  from rent                                                                   
and  royalties, which  could  easily be  fixed  by making  an                                                                   
allowance  to periodically  adjust  the principal  up.     He                                                                   
referenced   Page    2   of   the   amendment,    identifying                                                                   
appropriations  from  the  Earnings Reserve  Account.    That                                                                   
language  could be modified  to state:  "Except for  periodic                                                                   
transfers  to the  principal appropriations".   The  language                                                                   
could  specifically  make  a   constitutional  allowance  for                                                                   
periodic  moving from  the Earnings  Reserve  Account to  the                                                                   
protected principal by the Legislature.                                                                                         
                                                                                                                                
Co-Chair  Harris  commented that  there  was  nothing in  the                                                                   
proposed language  that would  prohibit the Legislature  from                                                                   
making an appropriation from the  Earnings Reserve Account to                                                                   
the  principal  protected  by   the  Constitution.    Senator                                                                   
Therriault  responded that  is  a question,  as  it would  be                                                                   
limited to only the money that  comes off the overall account                                                                   
and  amounting  to   the  5%.    It  specifically   has  been                                                                   
identified that  the 5% can only  be taken from  the Earnings                                                                   
Reserve Account.   Appropriations  from the Earnings  Reserve                                                                   
Account  may  be  made  only   for  certain  purposes.    The                                                                   
Legislature  has  not  provided  them the  latitude  to  make                                                                   
appropriations over  to the principal, however,  the language                                                                   
could easily be modified to specifically address that.                                                                          
                                                                                                                                
Co-Chair Harris  recommended that a sub-floor  could be added                                                                   
to indicate that  appropriations move back to  the principal.                                                                   
Senator  Therriault suggested  that  by adding  #4, there  is                                                                   
some  question whether  an appropriation  or principal  could                                                                   
come only out of  the 5% drawn.  He did not  think they would                                                                   
want to do that.  At this time,  Legislative Legal is working                                                                   
on an  amendment to modify that  language so that  a transfer                                                                   
from the  Earnings Reserve  Account could  be made  above and                                                                   
beyond the 5%.  He believed that  would be easy to accomplish                                                                   
and  then  they  would  need   to  address  policy  questions                                                                   
regarding the veto power of a transfer.                                                                                         
                                                                                                                                
Co-Chair Williams  reminded Senator Therriault  how difficult                                                                   
it  is  to   get  a  super  majority.     Senator  Therriault                                                                   
acknowledged  that it  can be  difficult but  if the 5%  only                                                                   
comes  out  of  the  Earnings  Reserve  Sub  Account,  it  is                                                                   
important  to make  sure that  a healthy  balance remains  in                                                                   
that account  in case  there is  a down  stock market,  there                                                                   
would still be sufficient funds.   The Legislature could feel                                                                   
pressure to make transfers to  the principal; if the Governor                                                                   
believes that too much has been  transferred without having a                                                                   
cushion, there might be a veto,  which is a part of the check                                                                   
and balance system.                                                                                                             
                                                                                                                                
Representative Fate voiced concern  about using the Permanent                                                                   
Fund for "rainy  day" purposes.  He warned  consideration for                                                                   
the  replenishment  of  the  Constitutional   Budget  Reserve                                                                   
(CBR).     He asked  Senator Therriault  how  he proposed  to                                                                   
address these  concerns if the above-mentioned  items tied up                                                                   
the Earnings  Reserve Account.  Representative  Fate believed                                                                   
this could exacerbate the problem over the years.                                                                               
                                                                                                                                
Senator  Therriault  responded  that  the issue  of  the  CBR                                                                   
repayment would be separate from  the proposed consideration.                                                                   
However,  if covering  the major costs  for public  education                                                                   
was taken out  of the Earnings Reserve Account,  then general                                                                   
fund  dollars  would  not  be   spent.    There  could  be  a                                                                   
possibility  of a  combination using  earnings, taxes  and/or                                                                   
other revenue  generating mechanisms  providing general  fund                                                                   
dollars at  the end of  the fiscal year  and swept  back into                                                                   
the CBR.                                                                                                                        
                                                                                                                                
Representative Fate realized that  those are expectations and                                                                   
that he  hoped that they  would happen, however,  present and                                                                   
past  experience  indicate  they  have  not  yet  come.    He                                                                   
suggested that  the legislation will exacerbate  the problems                                                                   
and  that  the  corpus  expands   and  future  problems  will                                                                   
continue.  The worst-case scenario is "worrisome".                                                                              
                                                                                                                                
Vice  Chair Meyer  appreciated  that  the Percent  of  Market                                                                   
Value concept  automatically places funds into  the principal                                                                   
and asked  how it would  work under Amendment  #3.    Senator                                                                   
Therriault explained  that it would work in  the same manner.                                                                   
The  protective principal  and the  Earnings Reserve  Account                                                                   
would  be managed  together.   If  there were  a down  market                                                                   
without sufficient  earnings, then a 5% draw  would be taken,                                                                   
without  money  drawn  from the  protected  principal.    The                                                                   
intent is to have the entire fund  managed, while maintaining                                                                   
the fund  and the 3% and  then, the Earnings  Reserve Account                                                                   
would  continue  to   grow.    It  would  be   good  to  have                                                                   
flexibility to move some funds  to the corpus while automatic                                                                   
inflation proofing keeps happening.    He concluded that a 3%                                                                   
would  be maintained  so  that  inflation proofing  would  be                                                                   
automatic.                                                                                                                      
                                                                                                                                
Vice Chair  Meyer understood  that in  the Percent  of Market                                                                   
Value concept  as presented  statewide.    In the  years when                                                                   
the return  is only  3%, it  is highlighted  that the  payout                                                                   
would continue  to be  at the  5% level.   He hoped  it could                                                                   
reach 8%.   Vice Chair  Meyer asked if  that would  be enough                                                                   
protection for the principal.   He thought that the amendment                                                                   
would provide  a "new  and different  twist" for the  voter's                                                                   
comprehension.                                                                                                                  
                                                                                                                                
Senator  Therriault  pointed   out  that  in  the  pure  POMV                                                                   
concept, during  a protracted down stock market,  there could                                                                   
be  erosion of  the principal.   There  does not  need to  be                                                                   
erosion because  the full 5% does  not have to be taken.   He                                                                   
emphasized that the  Legislature would be allowed  to take up                                                                   
to 5% and  that the "suspicious public" might  criticize that                                                                   
action.  The Legislature cannot  assure them that the erosion                                                                   
is not going to happen.  If the  language of the amendment is                                                                   
adopted,  it guarantees  a protected  principal, noting  that                                                                   
the Percent  of Market  Value methodology  is still  workable                                                                   
but  the  State needs  create  a  system  in which  they  can                                                                   
weather any  down markets.   Given Amendment #3,  the general                                                                   
public is assured that there will  continue to be a protected                                                                   
principal.                                                                                                                      
                                                                                                                                
Representative  Hawker   pointed  out  that  there   are  two                                                                   
distinct issues being considered through the amendment:                                                                         
                                                                                                                                
   ·    Consideration of the pure Percent of Market Value,                                                                      
        and                                                                                                                     
   ·    Section #2, involving a dedication of what the                                                                          
        earnings might be used for.                                                                                             
                                                                                                                                
Representative  Hawker indicated that  he would restrict  his                                                                   
thoughts  to the  percent  of market  value  discussion.   He                                                                   
inquired if Senator Therriault  had mentioned that the income                                                                   
would  be  accounted  for in  the  Earnings  Reserve  Account                                                                   
rather  than in the  principal account.   Senator  Therriault                                                                   
understood from working with Legislative  Legal that once the                                                                   
revenue is  realized, it would  then be accounted for  in the                                                                   
Earnings  Reserve Sub  Account.    Representative Hawker  was                                                                   
confused if  that meant  only the  realized earnings  and not                                                                   
those  that   result  from  increased  valuation.     Senator                                                                   
Therriault referenced  existing language on Page  1, Lines 12                                                                   
& 13, "All income from the Permanent  Fund shall be deposited                                                                   
into the Earnings Reserve Account."   He believed that should                                                                   
define all income.                                                                                                              
                                                                                                                                
Representative  Hawker  pointed  out that  section  indicates                                                                   
that  all income  in the  fund  shall be  deposited into  the                                                                   
Earnings  Reserve Account  as soon  as it is  received.   The                                                                   
intent is  that it must be  the realized earnings  as opposed                                                                   
to valuation changes.   If that is the intention,  then it is                                                                   
assumed that there could be a  decision to sell an investment                                                                   
with  the  presumption   of  an  absolutely   sound  economic                                                                   
decision,  the  income  not  received   and  taken  from  the                                                                   
principle and then placed into  the Earnings Reserve Account.                                                                   
He  questioned if  that was  an intended  division.   Senator                                                                   
Therriault  did not  know how  the  Trustees would  interpret                                                                   
that language and that it might  have to be modified in order                                                                   
to be made clearer.                                                                                                             
                                                                                                                                
Representative Hawker interjected  that would be an important                                                                   
distinction.   Point #2 creates  a strong desire on  his part                                                                   
to provide the greatest assurance  that whatever changes made                                                                   
would not compromise the ability  of continuing the dividend.                                                                   
Some earnings would be used for  public services and that the                                                                   
qualification  of "received"  would  apply  only to  realized                                                                   
earnings available  for appropriation.   The biggest  problem                                                                   
in  the  current  structure  is  that  the  Earnings  Reserve                                                                   
Account would  be within  the Permanent  Fund but subject  to                                                                   
appropriation.   He  thought that  it would  be possible  for                                                                   
someone  with  ulterior  motives   to  manipulate  investment                                                                   
policy  within the  fund.  Likewise,  they  would be able  to                                                                   
sell, which would  change the amount in the  Earnings Reserve                                                                   
Account.   Representative  Hawker  was troubled  that  action                                                                   
might create  in the constitutional  mandate, two  buckets of                                                                   
money  and subject  to  human manipulation.    Representative                                                                   
Hawker asked  if there were  sidebars that would  protect the                                                                   
State.                                                                                                                          
                                                                                                                                
Senator Therriault understood  that under the current system,                                                                   
there  could be  no possible  manipulation.   There might  be                                                                   
pressure  to sell in  order to  spike the  earnings.   If the                                                                   
State moved to  a Percent of Market Value system,  he thought                                                                   
that the  stream of revenue off  the account could  spike the                                                                   
earnings.   He  proposed  that nothing  could  be changed  if                                                                   
something was  sold, and  would not change  the value  of the                                                                   
fund with  no motivation to change  the revenue stream  if it                                                                   
was  5% of  the total  value.   He believed  that the  system                                                                   
proposed in  Amendment #3  would lend  itself less  to public                                                                   
pressure.                                                                                                                       
                                                                                                                                
Representative  Hawker summarized  that  the amendment  would                                                                   
place  the Earnings  Reserve into  a separate  bucket in  the                                                                   
Constitution and that  it would be protected.   The 5% factor                                                                   
would still  be based  on aggregate  value of  the fund.   He                                                                   
asked if there  would be a secondary constraint  and if there                                                                   
was  no money  in the  Earnings Reserve  Account, then  would                                                                   
there be no money  left to withdraw from that  fund.  Senator                                                                   
Therriault  explained that  possibility could  only exist  in                                                                   
the first  couple years, after  the establishment of  the Sub                                                                   
Account.     Thereafter,   and  if  a   healthy  balance   is                                                                   
maintained, the  State would be  able to weather any  kind of                                                                   
bear market.                                                                                                                    
                                                                                                                                
Representative Hawker thought  that the probably of the State                                                                   
having a disastrous  market in the near future was  slim.  He                                                                   
referenced  Senator Therriault's  definition of  income.   As                                                                   
indicated,  a transition  into the new  mechanism would  take                                                                   
place, making  certain that there  is income coming  into the                                                                   
Earnings Reserve  Account to support  a draw.  He  noted that                                                                   
specific  language   indicates  that  all  income   from  the                                                                   
Permanent Fund  shall be deposited into the  Earnings Reserve                                                                   
Account.  He  inquired how the amendment proposes  to address                                                                   
loss.  Senator  Therriault thought that the  Earnings Reserve                                                                   
Account could absorb the losses.                                                                                                
                                                                                                                                
Representative  Hawker  commented  that  an  earnings  bucket                                                                   
would  hold  all  gains,  losses,  income  and  the  sale  of                                                                   
investments.  Any market valuation  change would be accounted                                                                   
for on  the income  side.   He recommended  that area  of the                                                                   
bill  to place  Senator Therriault's  language  that the  net                                                                   
income  be accounted  for in  the  Earnings Reserve  Account,                                                                   
without  receipt  qualification   accounting  for  the  value                                                                   
change in  the Earnings  Reserve Account  and principal.   An                                                                   
amount currently  exists because  deposits have been  made to                                                                   
the fund from the State's oil and gas wealth.                                                                                   
                                                                                                                                
Co-Chair Williams  noted it would be difficult  to change the                                                                   
Constitution.   The  State does  not  know what  is going  to                                                                   
happen in the future.   If the bill was passed  as originally                                                                   
proposed, no money  could be taken out and  a situation could                                                                   
exist  where  there  might  be  no  money  left  to  pay  the                                                                   
dividend.  Senator  Therriault asserted that  the Legislature                                                                   
would  attempt to  balance out  the knowns  and unknowns  and                                                                   
that except  for the first  couple years, the  possibility of                                                                   
moving into an  immediate down market, there  would be enough                                                                   
money in  the Earnings  Reserve Account to  assure that  a 5%                                                                   
stream will be available.                                                                                                       
                                                                                                                                
Co-Chair Williams  spoke to the deposit made  to the Earnings                                                                   
Reserve  Account  and  that  by  incorporating  the  proposed                                                                   
amendment,  the State  could be  starting over  again with  a                                                                   
down market.   Senator Therriault stated that  in the future,                                                                   
when the Legislature considers  making a shift to protect the                                                                   
principal,  they might  have to  waive  it.   Making a  shift                                                                   
should  require  appropriation  if it  suffers  a  governor's                                                                   
veto.   If the amount  moved over  to the earnings  principal                                                                   
was large enough and the Earnings  Reserve Account was small,                                                                   
there could  be a  continued dividend  and then the  governor                                                                   
could  not  veto it,  removing  the  cushion.   It  would  be                                                                   
preserved.    He  acknowledged   that  there  might  be  some                                                                   
disagreement of  how big a cushion  should be continued.   He                                                                   
recommended that enough should  be left to guarantee that the                                                                   
5% would always  exist.  Senator Therriault  stressed that it                                                                   
is  important to  have a  healthy  Earnings Reserve  Account.                                                                   
Until  the   Earnings  Reserve  Account  and   the  protected                                                                   
principal are  all managed together,  then 5% would  often be                                                                   
the total.  There should be more  benefit to the public given                                                                   
the  method proposed  in  Amendment #3  as  it would  protect                                                                   
against a down market.  He thought  that the Earnings Reserve                                                                   
Account could be  just as big as the protected  principal and                                                                   
that the Legislature  could make a policy for  shifting money                                                                   
into either of the accounts.                                                                                                    
                                                                                                                                
Co-Chair  Williams  commented   on  placing  money  into  the                                                                   
principal  every year.   Senator  Therriault  stated that  it                                                                   
would  be  important  to  make sure  that  there  are  enough                                                                   
earnings available  in the Earnings Reserve  Account to allow                                                                   
for  the 5%  withdrawal,  addressing  transfers  made to  the                                                                   
protected principal.  He acknowledged  the argument regarding                                                                   
how much  to leave  in the  reserve.   There has always  been                                                                   
$100 million  dollars remaining in  that account.   There has                                                                   
always  been  a little  pressure  to  make sure  that  enough                                                                   
remained  in   that  account  for  paying  the   next  year's                                                                   
dividend.   Co-Chair  Williams  pointed  out  that there  are                                                                   
"politics involved".                                                                                                            
                                                                                                                                
Co-Chair Harris asked about the  point made by Representative                                                                   
Hawker regarding  the income and  to identify  what qualifies                                                                   
as income and loss.                                                                                                             
                                                                                                                                
BOB BARTHOLOMEW,  CHIEF OPERATING  OFFICER, ALASKA  PERMANENT                                                                   
FUND  CORPORATION,  DEPARTMENT  OF  REVENUE,  explained  that                                                                   
currently as  written, the  constitutional amendment  and the                                                                   
proposed Amendment #3 would continue  to do the accounting as                                                                   
it is done  at this time.   There are two buckets  for income                                                                   
or earnings.   The unrealized earnings, which  result from an                                                                   
asset going  up in value  after it is  bought and  defined in                                                                   
the  interpretation  of  the  language  remaining  "Shall  be                                                                   
deposited as  soon as it is  received".  He pointed  out that                                                                   
there is a solid record of what  that means.  When the assets                                                                   
are  sold,  the  realized  income   goes  into  the  realized                                                                   
earnings  reserve.     As  written,  the  5%   available  for                                                                   
appropriation would  come from the realized  Earnings Reserve                                                                   
Account.                                                                                                                        
                                                                                                                                
                                                                                                                                
TAPE HFC 04 - 69, Side B                                                                                                      
                                                                                                                                
                                                                                                                                
Co-Chair  Harris asked  what would  happen  to the  principal                                                                   
and/or the loss.   Mr. Bartholomew commented  that they would                                                                   
be  treated just  like the  gains.   The  unrealized loss  is                                                                   
currently part  of the principal allocation principle.   When                                                                   
a stock is sold for less than  it is paid for, that becomes a                                                                   
realized loss and goes into the Earnings Reserve Account.                                                                       
                                                                                                                                
Co-Chair   Harris  thought   that  was   more  difficult   to                                                                   
understand.   A gain would  be money going  in.  He  asked if                                                                   
money would be taken out of the  Earnings Reserve Account and                                                                   
deposited  into the  principal  to  make up  the  loss.   Mr.                                                                   
Bartholomew  said no, but  instead would  handle it  the same                                                                   
manner it  is currently  is done.   In the  middle of  a bear                                                                   
market,  there  were  many  realized   losses  and  they  are                                                                   
reflected  in the  Earnings Reserve  Account.   That  account                                                                   
goes up when there  are gains and down when there  is a loss.                                                                   
The portions that are in principal,  when it is an unrealized                                                                   
loss, would stay if it was an  unrealized loss.  The existing                                                                   
rules of  the Permanent Fund  were written twenty-five  years                                                                   
ago and  are a little  outdated.  He  proposed that  the area                                                                   
that should be discussed is treatment of gains and losses.                                                                      
                                                                                                                                
Co-Chair  Harris  questioned if  there  are  losses from  the                                                                   
principal,  would  they  be  made  up  through  the  Earnings                                                                   
Reserve Account.   Mr. Bartholomew responded  that, today, as                                                                   
written  and  as  described, the  principal  value  would  be                                                                   
reduced  until  the investments  were  sold.   If  there  are                                                                   
losses in the stock market, the  balance of the fund can fall                                                                   
below the  principal level,  which has happened.   That  is a                                                                   
rare situation.   If stocks were sold, that  would bring down                                                                   
the balance of the Earnings Reverse Account.                                                                                    
                                                                                                                                
Co-Chair  Harris  asked  what  would happen  if  the  balance                                                                   
wasn't  large enough  in a  down market.   He  asked if  that                                                                   
would put  the Board  of Trustees in  a situation  where they                                                                   
would have  to take  a loss.   Mr. Bartholomew observed  that                                                                   
there are short  to mid term risks, which they  believe works                                                                   
over the long run.  If there is  a large amount of unrealized                                                                   
earnings and the realized earnings  account has little income                                                                   
paid out, the  balance could be affected through  the selling                                                                   
of investments.   Historically, the Board has  deliberated on                                                                   
that issue  and taken action.   The primary policy is  to not                                                                   
to  make decisions  based  on what  goes  in and  out of  the                                                                   
Earnings Reserve Account and the  decisions to sell should be                                                                   
based on the market.                                                                                                            
                                                                                                                                
Co-Chair  Harris understood  that the  amendment attempts  to                                                                   
protect the principal  in the Constitution.   Mr. Bartholomew                                                                   
pointed  out  that  Section  1 of  the  amendment  makes  the                                                                   
distinction between  protecting the principal or  moving to a                                                                   
pure  percentage of  market  value so  that  the 5%  spending                                                                   
limit provides  statutory guardrails  that prevent  from over                                                                   
spending when income is not available.                                                                                          
                                                                                                                                
Representative  Joule  questioned   if  the  amendment  would                                                                   
impact the sweep.  Mr. Bartholomew  responded that he had not                                                                   
been  involved in  the process  to determine  the CBR  sweep.                                                                   
Senator Therriault  did not think it would  impact the sweep,                                                                   
noting that  the Court's have  determined that  the Permanent                                                                   
Fund  and the  Earnings Reserve  Account are  not sweep  able                                                                   
accounts.                                                                                                                       
                                                                                                                                
Representative  Hawker   questioned  if  the   value  of  the                                                                   
principal could erode  over time.  He inquired  if those were                                                                   
issues  with the  existing  structure and  if  they could  be                                                                   
resolved through  a pure POMV  methodology.  Mr.  Bartholomew                                                                   
noted that the original POMV and  the amendment could achieve                                                                   
the goals  of the Trustees, which  are, in good  years, spend                                                                   
only  the  sustainable  yield   of  the  Permanent  Fund  and                                                                   
overtime,  5% of the  total value.   The  amendment allows  a                                                                   
risk in  the near term that  there could be less  than needed                                                                   
for a full  distribution during extended down  markets in the                                                                   
short  term.   He added  that  the issue  of  principal is  a                                                                   
public image  concept.  Near  term good markets  would reduce                                                                   
the risk.  Arcane accounting methods  would be retained.  The                                                                   
Corporation  knows that  they can deal  with continuation  of                                                                   
the current accounting methods.                                                                                                 
                                                                                                                                
Senator Therriault observed that  the Trustees are advocating                                                                   
for the long-term  health of the asset.  The  downside of the                                                                   
accounting method  would be done  away with through  the pure                                                                   
Percent of Market Value and if  the pubic does not accept the                                                                   
POMV method, nothing would change.                                                                                              
                                                                                                                                
Representative Hawker  acknowledged the controversy  and felt                                                                   
that the  Committee should  put forth  the best policy  call.                                                                   
He indicated his concern with Amendment #3.                                                                                     
                                                                                                                                
Co-Chair Williams  added that the Committee  has taken public                                                                   
testimony on the Percent of Market  Value for over a year and                                                                   
that there  has not  yet been public  testimony taken  on the                                                                   
proposed amendment.   He expressed support for  Version /U of                                                                   
the legislation.  He observed  that the amendment, reflecting                                                                   
the Senate version,  could be discussed when  the Senate bill                                                                   
moves  to the  House floor.    Senator Therriault  emphasized                                                                   
that the language in the Senate  version has been debated and                                                                   
that the  House should  not lose  sight of  what is  possible                                                                   
while striving for what is perfect.                                                                                             
                                                                                                                                
Representative  Joule voiced  his  support for  Section 2  of                                                                   
Amendment #3.   He suggested that  section could be  added to                                                                   
Version \U of the bill.                                                                                                         
                                                                                                                                
Co-Chair  Williams  stated  that  HJR  26 would  be  HELD  in                                                                   
Committee for further consideration.                                                                                            

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